Stock split: Why do companies split face value of stocks?
Introduction to stock split
A stock split is a corporate action, where the face value of the existing shares is reduced in a defined ratio. A stock, if split in the ratio of 1:5, splits an existing share into five shares, thereby, reducing the face value of the shares to one-fifth of the original face value.
For example, if an investor holds 100 shares of a company with a face value of Rs 10 each, a stock split in the ratio of 1:5 will increase the number of shares held by the investor to 500 but the face value of each share will go down to Rs 2. However, the value of the investor’s holding will not change.
Why do companies split shares?
Companies consider a share split if the price of the shares in the secondary markets is seen to be very high, which eventually restricts investors' participation. A share split leads to greater liquidity in the market and expands the customer base for the companies. From the company’s perspective, there is no change in its share capital since an increase in the number of shares is offset by a fall in the face value.
After the split, as liquidity increases, the ease of trading too increases, leading to a greater number of investors' participation. This might bring in volatility in the stock price. Thus, sometimes, investment in these stocks becomes risky and uncertain.
But at times, stock split is beneficial as investors can accumulate a higher number of shares of blue-chip companies that are usually expensive.
Recently in 2021, some of the well-known companies such as Alkyl Amines Chemicals Ltd and Finolex Industries Ltd carried out stock split. On May 11, 2021, Alkyl Amines had split its stock from the face value of Rs 5 to Rs 2 per share. On April 15, 2021, Finolex Industries had split the stock from a face value of Rs 10 to Rs 2 per share.